EU Carbon Price Emerges as Flashpoint in Push for Cheaper Energy

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(Bloomberg) — The future of the European Union’s flagship carbon market is set to become a sticking point in a debate among member states Tuesday on how to reduce energy prices.

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A gathering of environment ministers in Brussels to discuss lowering the bloc’s energy costs in the face of the Middle East conflict is likely to expose the differences among the EU’s 27 nations over the role of the Emissions Trading System. While Italy and Slovakia are calling for a suspension of the ETS, a group including Denmark and Spain defend the program as Europe’s most effective tool to guide clean investment.

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Started in 2005, the cap-and-trade system imposes gradually shrinking emissions curbs on more than 10,000 facilities owned by power utilities and manufacturers in sectors from steel to chemicals and cement. The carbon market, which is set for reform later this year, has been criticized by the region’s struggling heavy industry.

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The market adds to the cost of fossil fuel generation, providing an incentive for power companies to decarbonize. Those costs also get passed on to consumers, with carbon prices accounting for around 11% of power bills in the region, according to EU data.

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For utilities such as Sweden’s Vattenfall AB, the ETS provides certainty for investments and shouldn’t be watered down.

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“Don’t mess with the ETS,” said Anna Borg, chief executive of Vattenfall. “Regulatory stability is not a nice-to-have. It is what enables the massive investments, required for the transition. Only a decarbonized Europe is a competitive Europe.”

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The discussion by ministers will prepare the ground for a gathering of EU heads of government on Thursday, where energy is set to be a key issue after the Iran war disrupted global flows of oil and gas. Across European capitals, spiking energy prices are boosting government concerns about inflation and a backlash from voters if the crisis hits consumer wallets.

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Power prices differ across Europe. They are most expensive in Italy, which relies heavily on gas for electricity generation. Spain has lower power prices as its large renewable fleet makes it less reliant on gas plants, which set the market less often. 

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In a letter to leaders on Monday, European Commission President Ursula von der Leyen highlighted carbon costs as one power price components that the EU regulator wants to address in a short-term plan. She said the commission will propose a review of an ETS mechanism that controls the supply of carbon permits to “more effectively address excessive price volatility and keep prices in check in the short term.” 

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It’s not clear when exactly the EU will put forward the revision of the so-called Market Stability Reserve, which withholds extra permits from the market if a certain threshold of allowances in circulation is met. EU Climate Commissioner Wopke Hoekstra told reporters on Tuesday that it will come before a broader review required by law by July.

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Any changes to the MSR, which started absorbing permits in 2019, will need approval by member states and the European Parliament.